Bank of Buffalo v. Schwartz

Spring, J.:

On the 9th day of July, 1897, Elliott C. McDougal' held as trustee for the plaintiff and two other banks in the city of Buffalo, four promissory notes made by said Marcus L. Schwartz and aggregating $27,000. One of the said notes was then past due and the others would not mature until March 9, 1898. The payment of said notes was guaranteed by David Danziger, the father of the defendants Jennie, Cora and Hiram Danziger and Stella Klopfer, and also by the other defendants in this action. The plaintiff also owned the other promissory notes described in the foregoing agreement, and on which said Marcus L. Schwartz was maker. At the request of the defendants in this action said agreement was entered into, and the four notes of $6,750 each were given pursuant thereto by-said Marcus L. Schwartz and delivered to said plaintiff, and discounted by it for the benefit of said maker, and the four notes, above referred to, were delivered up to him. The first of the said series of notes matured September 9, 1897, and was renewed by another note for a like sum by said maker, and, upon its maturity, it was again renewed by a similar note due in four months. The two notes next in the series were also renewed in like manner, neither extending in date beyond March 9, 1898. The fourth of the said series was paid December 23, 1897, by the defendant Henry L. Schwartz, and these renewals were made without the knowledge or consent of any of the said guarantors. Said plaintiff did not accept said renewal notes in payment of said nine original notes, and the referee has so found as a fact and decided as matter of law.

That the extension of the time of payment of an obligation for a valuable consideration, without the consent of the surety, releases the latter is elementary. And this follows, though no injury results from such extension, as the surety is entitled to have his agreement construed strictly and without substantial change in it. (Page v. Krekey, 137 N. Y. 307; Livingston v. Moore, 15 App. Div. 15.)

It is also well settled that the acceptance of the interest, as in this case, with the renewal note, constitutes a good consideration for such extension. (Hubbard v. Gurney, 64 N. Y. 457; Shipman v. Kelley, 9 App. Div. 316.)

A construction of the agreement, with its attendant facts, is essential in ascertaining whether the defendants are compassed by these frequently-asserted principles. The. many notes which were outstanding against Marcus L. Schwartz, the fact that several were held against him by McDougal as trustee for three banks, and that others were for interest on notes, indicate that he was in straitened circumstances at the time the agreement was made. There was an evident purpose on the part of his relatives to give him an opportunity to relieve himself from his tangled financial condition. Paper to the amount of $27,000 was already guaranteed, and the only increase in the liability of the guarantors on the new paper was in agreeing to pay $2,160, which was interest on this large indebted-, ness, and for which the banks had taken four notes of said principal debtor, the last of which matured March 9, 1898. The benefit to the plaintiff in this transaction was in the two provisions that the unguaranteed paper, aggregating nearly $10,000, must be paid by Schwartz before the guaranteed paper was paid by him or his guarantors, and that no security could be taken by the latter until the unguaranteed paper was paid. The benefit to the guarantors was in the extended,time assured to their relative and the right of any single guarantor to limit his liability by paying the specific sum provided in the agreement, and which in no instance amounted to a third of his possible liability.

There were two distinct classes of paper affected by this agreement : First, the guaranteed notes which represented substantially the indebtedness for which these sureties were already liable, and, second, the unguaranteed notes, two of which, amounting to over $3,700, fell due within sixteen days after the making of the agreement, and the last one of $500 matured November twenty-fifth of the same year. It is apparent, therefore, that the guarantors did not expect these unguaranteed notes would be paid at maturity. That expectation would be too antagonistic to the previous manner in which Schwartz had conducted his business. There was no restriction on plaintiff’s power to extend these notes, and the right to pay them by the defendants was not given in the agreement. The deduction is plain that these unguaranteed notes were to be extended along in the hope that Schwartz would pay them in time. It accordingly was obvious that the guaranteed notes would not be paid as they severally matured unless the guarantors availed themselves of their privilege to end their liability. The agreement contains indisputable evidence of this fact. It provides : “ The undersigned do further agree that said Bank of Buffalo can hold any past due paper guaranteed by the undersigned as aforesaid without notice to them, and without impairing their liability on account of their guaranty as aforesaid.”

If this meant that it should remain as past due paper the clause was unnecessary, for the bank did not lose its right against the sureties by mere indulgence to the debtor. This is especially true in view of the fact that its payment was to be postponed until the payment of the notes correlatively provided for in the agreement. It could not be expected by these guarantors, apparently business people, that the bank would hold this paper overdue and be subjected to the criticism of the bank examiner, and perhaps be compelled to charge up to profit and loss notes which were collectible. It certainly was not intended that they would be collected promptly as they severally matured. If there is one thing patent in this agreement it is that time was to be given Marcus L. Schwartz to lift himself from the slough in which he had become mired. If the plaintiff had at once insisted that these notes be paid as they severally became due, such conduct would have been considered violativeof the fair import of the agreement, and would have ended all probability of collecting the unguaranteed notes. It is, therefore, a fail-inference that when these defendants consented that the bank “ can hold any past due paper guaranteed by the undersigned,” it referred to its continuance in the ordinary way as bankable paper. The contract of guaranty was not on the notes themselves; they were not. signed by these defendants; their liability was exclusively in the-independent agreement which was turned over to the plaintiff. If the notes were renewed they would not sign them. The provision permitting the bank to hold the past due paper provides that it can be-done “ without notice ” to the defendants. Without notice of what?' The agreement contained the several dates of the maturity of the notes, and as the defendants were not indorsers, notice of protest was-not essential. Was this to relieve the bank from advising them that these notes were due? Was this carefully drawn document, covering a large indebtedness, intended to contain a distinct independent, provision, so utterly meaningless ? The obvious intention was that-as these notes matured they should be carried along in the usual way-; that the bank could rely upon its contract of guaranty without advising the guarantors of each renewal. These notes could not be paid until the unguaranteed notes were paid, and until that event occurred, the renewal of these notes did not alter an iota the relations of these parties. No security could be taken, so there could be no possible loss on that account. The test of the releasing of the surety from liability by the conduct of the creditor is whether there has been an alteration of his agreement. The suretyship is governed here by the contract made at the request of the sureties, and within a reasonable construction of that instrument, the renewal of these notes did no violence to the intent of the parties. We must read into the agreement that it was made conformably to the usages of the business to which it had a special application. We must conclude that the provision permitting the holding of this-paper after maturity had some significance, and was not mere surplusage. We must bear in mind the relations of these parties, the purpose of the agreement and all the surrounding circumstances, and in the light of these aids the conclusion seems to us inevitable that the renewals were within the purview of the agreement.

“ The reason why extension of time of payment discharges the surety is that he would be entitled to the creditor’s place by substitution. * * But this principle on which sureties are released 4 is not a mere shadow without substance. It is founded upon a restriction of the rights of the sureties by which they are supposed to be injured.’ Therefore, when there is a legal impossibility of injury, the principle does not apply.” (Daniel Neg. Inst. [3d ed.] § 1313.) In this case the two classes of notes were interlinked and the right of substitution could not be available to the guarantors, as already stated, until the notes which Schwartz alone was liable to pay had been extinguished. The philosophy of the rule discharging the surety by an extension of time to the principal debtor does not, therefore, exist. While injury need not follow as the result of the extension to release the surety, the possibility of injury is the foundation of the principle. The right to extend the unguaranteed notes was not restricted, but, on the contrary, a fair construction of the instrument implies that such renewal or extension carried along with it the date when the payment of the guaranteed paper could be made. It would be idle to permit the unguaranteed paper to be renewed and still prohibit the renewal of that which the defendants might be liable to pay. Undoubtedly, an undue exercise of the right to extend the paper on which they were not liable might operate to release them as guarantors, but the short time here given cannot subject the plaintiff to criticism.

By the terms of the agreement, none of the guaranteed notes could be paid until 44 all the other notes hereinbefore described shall be paid by said Marcus L. Schwartz.” This language is significant, for it includes the four notes for interest amounting tó $2,160, and which, by a separate clause in the agreement, were also guaranteed by the defendants. The last of these notes did not mature until March 9, 1898. It, therefore, must have been expected when the agreement was executed that the guaranteed notes could not be paid until that date. There was no renewal of any of the guaranteed paper beyond that period. In any event, until that date, the defendants knew they were absolutely powerless to act. Whether the guaranteed notes were renewed or remained as dormant paper was not of the slightest consequence, therefore, to these guarantors, for they could take no security and could not be subrogated to the rights of the plaintiff in any way until the stipulated pay day was reached. There was no actual extension of the time of payment by the renewal of the guaranteed paper as long as it did not pass beyond this boundary line.

The judgment should be reversed and a new trial granted, with costs to the appellant to abide the event.

All concurred, except McLennan, J., not voting.

Judgment reversed and new trial ordered^ with costs to appellant to abide event.